Medical Stop-Loss Group Captives Can Provide Numerous Benefits

Being member owned and directed, medical stop-loss group captives offer their participants an opportunity to make a transition from being passive purchasers of stop-loss coverage to jointly owning a stop-loss reinsurance company.

As owners of the stop-loss captive, members of the group make the decisions on how the captive operates, said Joe Parrilli, senior vice president at Captive Resources LLC.

"As a captive consultant, we do not show up and drive the captive forward; we do not make the decisions for the members," Mr. Parrilli said. "We continue to facilitate ideas, which then they decide how their reinsurance company is going to move forward.

"That, compared to the traditional marketplace, is one of the reasons that captives have become more important, have become more of a conversation," he said. "Groups have gotten a little fed up with what's going on in the traditional market. So, having that ownership is a key within a captive and a reason we have seen them become more successful."

Mr. Parrilli noted that the stop-loss captive reinsures a fronting stop-loss insurer for a defined layer of risk. The captive layer of risk is funded with a risk/reward mechanism with an element of pro rata risk sharing.

"At the core, a captive is a reinsurance mechanism to a stop-loss [insurer]," he said. "And it's a defined layer of risk."

Speaking as part of a panel titled "What's Behind the Growth in Medical Stop-Loss Group Captives?" at this year's Captive Insurance Companies Association International Conference, Mr. Parrilli suggested that stop-loss captives provide participants several benefits. Among them are stabilization of healthcare spending, increased flexibility in how they structure their health plans and the vendors they select, and transparency into such factors as dollars in and out, risk sharing, investment income, and the captive's overall performance.

"The idea of the captive really focuses on control; it focuses on stabilization," Mr. Parrilli said. "When we're talking about control, we're really talking about that total healthcare spend."

While premium is an important part of the overall captive cost, someone approaching a stop-loss captive focusing exclusively on premium would be "missing the boat," Mr. Parrilli said.

"The premium plays a big part of it—it's a focus of the captive, but at the end of the day, if you're truly going to stabilize cost over a long period of time, you need to look outside that premium basis and into how can we start to control and stabilize that everyday spend," he said. "That's why that relationship between a broker and a consultant and the client is pivotal."

"For me, our broker was the most important part of it," said Vanessa Andersen, human resources director at Rummel Construction, Inc. "If you don't see eye to eye with your broker and they don't have a relationship to what your needs are, it's not going to work."

The flexibility the captive can offer into plan design and vendor selection is another important consideration, Mr. Parrilli said. "Every company is different; every company from a cultural perspective has different needs, especially when it pertains to medical insurance," he said. "So, the flexibility to be able to create a plan that's going to fit your company and, truthfully, have the ability to change as everything within the medical industry continues to fluctuate, is what's driving a lot of the success."

Meanwhile, participating in a group stop-loss captive provides a level of transparency impossible to achieve in doing business with traditional market stop-loss insurers, he said. "From the traditional market perspective, you don't have transparency into who you're sharing risks with, who's in that pool in the traditional market, where are all my dollars going, how are they being used, and what happens when there is a surplus," Mr. Parrilli said.

"These are all questions that in our own businesses I'm sure we ask on a daily basis," he said. "Now the owners of the captive have the ability to see that information as well and ask those questions."

"The transparency, for me it's mind blowing," said Ms. Andersen.

The stop-loss group captive also provides member employers the opportunity to share innovative ideas with other like-minded companies that can contribute to greater success, Mr. Parrilli said. "When you're talking about figuring out innovative ways to continue to control spend, who better to learn from than the other groups going through it," he asked.

That ability to collaborate and share information might be the greatest single benefit of a group stop-loss captive, Mr. Parrilli said.

Renee Bosley, senior vice president of employee benefits at EPIC Insurance Brokers and Consultants, said that what's made captives a more attractive option to employers in their health benefit programs isn't so much what has changed in the traditional market but what hasn't, namely finding ways to control the cost of care.

"The traditional market is pretty status quo," Ms. Bosley said. "So [for] clients who come into a captive, it starts with wanting something different.

"The one thing I tell all my clients is that the insurance is not your problem. The captive is purely a funding mechanism that gives you some reward," she said. "The problem is not the insurance, it's the cost of the care itself. It's the hips, knees, shoulders, MRIs."

To control an organization's healthcare costs, it's necessary to understand the factors driving those costs in a way traditionally insured employers can't, Ms. Bosley suggested.

"In the healthcare cost space, there are layers of unnecessary cost," Ms. Bosley said. Among them are billing errors and egregiously elevated costs of infusion treatments, she said.

"The point is that what is happening in the traditional market that is driving people is the fact that the market isn't changing, it's not coming along. It's still the status quo increases, and clients are tired of it," Ms. Bosley said. "So, let's unpack it, let's get beneath these contracts, what's driving your costs."